Forecasting Risk
Posted by Neil Smith | Emerging Risk on Thursday 30 June 2011, 3:35PM Share
Neil considers the potential of long-range forecasting for the insurance industry.
We are at the beginning of another hurricane season and everyone is waiting with bated breath to see if it will be “third time lucky” for the insurance industry with no major hurricanes making US landfall for the third year in a row.
As always we have seen the usual round of seasonal forecasts and all are predicting another active season. It therefore seems a good time to consider how the insurance industry uses forecasts to inform decision-making and whether it is time to investigate new methods and techniques given the recent advances in technology and climate research.
Forecasting scientists are now developing models to predict weather events and patterns over timeframes from the seasonal to several years. Increasingly sophisticated forecasting models take into account ocean and atmosphere conditions, as well as seasonal and regional climate trends, such as El Nino. Forecasters are also refining the skill of these models which should make them more relevant to the premium setting and capital decisions insurers make.
As the impacts of climate change are increasingly felt, and in particular the growing evidence that climate change is resulting in more frequent severe weather events including hurricanes, such longer-range forecasting approaches should play an increasingly important role in the insurance industry.
Lloyd’s recently held a series of expert workshops to explore the potential of long-range forecasting for the insurance industry and used the outputs from these sessions to prepare a Forcasting Report. This report, jointly produced with the Met Office, highlights both the challenges and potential benefits of introducing long-term forecasting into the insurance industry.
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